Minerals Technologies Inc. (NYSE:MTX) Q3 2023 Earnings Call Transcript

Minerals Technologies Inc. (NYSE:MTX) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good day, everyone, and welcome to the Third Quarter 2023 Minerals Technologies Earnings Call. Today’s call is being recorded. At this time, I would like to turn the call over to Lydia Kopylova, Head of Investor Relations for Minerals Technologies. Please go ahead, Ms. Kopylova.

Lydia Kopylova: Thank you, Melinda. Good morning, everyone, and welcome to our third quarter 2023 earnings conference call. Today’s call will be led by Chairman and Chief Executive Officer, Doug Dietrich; and Chief Financial Officer, Erik Aldag. Following Doug and Erik’s prepared remarks, we’ll open it up to questions. As a reminder, some of the statements made during this call may constitute forward-looking statements within the meaning of the federal securities laws. Please note the cautionary language about forward-looking statements contained in our earnings release and on these slides. Our SEC filings disclose certain risks and uncertainties which may cause our actual results to differ materially from these forward-looking statements.

Please also note that some of our comments today refer to non-GAAP financial measures. A reconciliation to GAAP financial measures can be found in our earnings release, and an appendix of this presentation which are posted on our website. Now I will turn it over to Doug. Doug?

Doug Dietrich: Thanks, Lydia. Good morning, everyone. And thanks for joining today. Let me start off by giving you a quick outline for today’s call. First, we’ll take you through the highlights of our third quarter. And as part of this, I’ll provide some commentary on the dividend increase and share repurchase program we announced last week. I also want to give you a quick update on Barrett’s Minerals. I don’t want to spend a bit of time going a bit deeper into what drove this quarter’s strong performance and why I feel it’s an indication of how we’ve positioned ourselves for continued profit improvement. After that, we’ll give an update on general business conditions and market trends. Erik will then review the financials and provide an outlook for the fourth quarter.

And we’ll have plenty of time to take your questions at the end of our comments. I’m sure you’ve already reviewed our third quarter earnings press release. So, let’s go through some of the main highlights. We had record sales for third quarter, delivered record operating income for any quarter, significantly improved margins and increased cash flow. These results are reflective of how we’ve positioned ourselves strategically, and how we’re executing from an operating perspective. Our business segments are performing well. Each continue to face mixed market conditions through the quarter. But despite this MTI achieved record third quarter sales. Let me give you some of the highlights. Within the Consumer Specialty segment, the Household and Personal Care product line continues to show strength with stable growth across all geographies.

The main highlight being pet care sales, which increased 15% over last year, and our animal health products growth of 38% from last year, as the natural feed additive market continues to develop. In the specialty additives product line, paper markets in North America and Europe remained slow. Although Asian paper markets were stronger, and volumes improved, due to our newest satellites in the region. We also saw solid performance from our ground calcium carbonates products in North America. In fact, our GCC facility located in the western U.S. had a very strong quarter drinking production sales and income records. And the engineered solution segment our high temperature technologies product line delivered especially strong performance. North America steel and foundry markets remained stable.

And the China foundry market continues to improve each quarter. This business hit on all cylinders, gaining market share, maintaining pricing, capturing input cost savings, and delivering a strong operating performance at production facilities. And the environmental infrastructure product line. Wastewater treatment, environmental lighting systems and drilling products had a solid quarter. We continue to see weak activity in the commercial construction waterproofing market. Next, EBIT margins expanded to 14.1% this quarter 170 basis point improvement over last year. Both segments expanded margins significantly. We captured input cost savings, improved productivity and our operations. Held pricing and in many cases continued to improve pricing and leverage our fixed cost base through discipline spending in progress with our $10 million expense reduction program.

Strong sales and expanded margins yielded $77 million of operating income, which is a record for any quarter for MTI. As we expected cash flows improving, cash from operations increased 30% sequentially, and year-to-date, it has more than doubled over last year to $138 million. The stable sales trajectory of our portfolio of businesses and the expansion of profit margins, we’re confident in stronger cash flow levels going forward. Our board shares this competence, which is illustrated by the increase last week in our quarterly dividend from $0.05 to $0.10 and the authorization of a new $75 million share repurchase program. Before I move on, I want to give you a brief update on where we are with Barrett’s Minerals. As we’ve discussed on these calls, over the past year, cases filed against BMI continued to increase, as well as the cost to defend itself against these claims.

We believe these claims to be meritless. And we’ve always stood by the safety of BMI products. The reality of the soaring legal costs overwhelmed this small business. And as a result, on October 2nd, BMI announced that it filed for Chapter 11 protection. As a result of this, we recorded a one-time non-cash impairment charge of the BMI fixed assets, as well as the charge for the litigation costs associated with the bankruptcy process. In the fourth quarter, we expect to fully remove this business from our financial results. We considered several options and decided that using the bankruptcy process was the best path to protect the business MTI and all stakeholders. Process will take time to fully resolve and BMI will continue to operate per usual throughout, we’ll be sure to update you as it progresses.

We see this as a significant step in moving forward and ensuring that our corporate energy is squarely focused on achieving our five-year growth and performance targets. Let’s take a few minutes to go a bit deeper into our quarter. Not to highlight the numbers as I just did, but rather to illustrate what’s behind them what’s driving them, and why we’re confident this will continue. Performance this quarter is a product of several elements that are coming together. Driven by our strategy and supported by a strong operating model. It starts with our top line revenue profile made up of our resilient and stable portfolio of businesses. Our ability to deploy our core technologies, combined with our ingrained culture of operational excellence, and the advantage we gained through owning unique long term global mineral reserves.

We’ve talked extensively about how we’ve now positioned ourselves in higher growth consumer-oriented markets like pet care and other consumer specialties, while also establishing strong positions in higher growth geographies. This quarter, the stable growth from these areas offset the slowness we experienced in other end markets, like North America, commercial construction and European steel. The stable growth markets give the company much more balanced than it has in the past and their other markets recover, sales will accelerate. This is the combination that yields meaningfully higher long-term growth. We also outlined for you our margin expansion targets. There are three main areas that we see driving margins higher going forward. Improved price costs, improve mix from the natural growth in higher margin products, and our ability and discipline to leverage this growth on our fixed cost base.

All three of these elements contributed to the margin expansion this quarter, and we see them continuing to contribute to our margin expansion going forward. MTI’s long term growth potential combined with expanding margins leads to increased cash flow generation. Our balance sheet is in good shape, with net debt around our targeted levels. Combined with this stronger cash generation, we have ample financial resources to fund capital expenditures, pursue M&A, as well as support an increased dividend and new share repurchase program. All of this is consistent with our balanced approach to capital deployment, and specifically our commitment and history of returning cash to shareholders. Let me wrap up this slide by stating that MTI has a powerful business model, one that combines revenue stability, and growth potential with operating discipline, technological capabilities, vertical integration, and a strong people centered culture.

This quarter is an excellent example of how those elements came together, and how they will continue to provide value in the future. This is a strong quarter for us, but it had more potential. We’ve got a lot more gas in the tank, so to speak, and we’re well on our way to meeting the financial targets we laid out for you earlier this year. Okay, before I pass it on to Eric, let me take you through of our markets and what we’re seeing. Overall, our market outlook remains similar to what we shared last quarter, with the exception that we’re entering some seasonal periods for a few of our markets. Let’s start with the Consumer & Specialty segment. Overall, we’re seeing continued strong market conditions across our household and personal care markets.

There are several near term and long-term trends that are driving this strength, that carries entering it seasonally strong period in both North America and Europe over the next two quarters. But more broadly, we continue to see positive demand trends for both private label cat litter in the U.S., as well as premium offerings in Europe, which is where we’re positioned in each market. Further, we see continued demand growth in the Asia pet litter market, and we’re well positioned to capture this with our mining and production locations. We also expect other HPC markets including edible oils, renewable diesel, animal health and personal care to also remain on their stable growth path in the fourth quarter, and through 2024. And specialty additives our market outlook remains positive.

So, Q4 is typically a seasonally slower period for residential construction. We expect gradual improvement in the North American paper market. Looking into next year, we will see a boost in volumes from the tree paper and packaging satellite ramp ups that are taking place in Asia right now. We also have a solid pipeline of new packaging business opportunities. We continue our growth and transition as we continue our growth and transition into this market adjacency. As we look at the engineering solutions markets, we see more mixed conditions. And high temperature technologies we have a generally positive outlook for both the steel and foundry markets. We see continued stable conditions for our foundry and steel products in North America, and a continued gradual improvement for the foundry market in China.

We’ve signed several long-term contracts for our laser and refractory application equipment that a number of these come online next year, it will help drive volumes and sales higher. Moving to environmental and infrastructure, we have a mixed and more cautious view on these end markets. The market for our environmental lighting systems as well as major remediation projects tend to slow and Q4 and Q1. We also don’t expect to see any improvement in the commercial construction waterproofing market, which has been slow all year. The positive side infrastructure drilling and environmental wastewater markets should remain solid throughout the quarter. Looking further out, our team has been making great strides in gaining attention for our floors or technology for PFAS remediation.

The business currently has over 200 active pilots and trials. And we recently presented our technology and unique capabilities at the Gabelli PFAS symposium. This presentation is available on our website if you’re interested to learn more. In summary and we see relatively strong markets for us as we head into the end of the year. More so we built strong momentum across all product lines, which sets us up for another strong year in 2024. Now let me turn it over to Erik to review our financials in more detail, Erik.

Erik Aldag: Thanks, Doug. And good morning, everyone. Let’s start by reviewing our third quarter performance and also provide our outlook for the fourth quarter. Following my remarks, we’ll turn the call over for questions. Now let’s review our third quarter results. Let me start by saying we had a strong third quarter marked by records for adjusted operating income and EBITDA, significant margin improvement and higher cash flow. Overall sales were $548 million similar to both the prior quarter and prior year. You can see in the bridge on the top right that two of our product lines grew sales and two were lower, reflecting the mixed market conditions we are experiencing this year. This bridge is a good representation of the benefit that our higher growth consumer-oriented products are having on the overall portfolio, providing stability and growth when other markets aren’t as strong.

And we are leveraging our sales into significantly higher earnings across both segments. Operating income excluding special items increased 15% versus last year and improved 9% sequentially to $77 million a record results for MTI. And we remain on track to deliver our targeted margin improvement. Operating margin improved to 14.1% of sales in the third quarter. This result was 170 basis points above last year and a 130 basis points higher sequentially driven by the combination of price cost recovery, productivity improvements and favorable mix from the growth of higher margin specialty products. Adjusted EBITDA was $102 million in the quarter and represented 18.6% of sales. It’s worth noting that this was the first time that the company has generated quarterly EBITDA above $100 million.

Our reported results included two special items in the quarter. The largest of the two was a non-cash $72 million impairment of all the fixed assets within Barrett’s Minerals Inc. The second special item was a $13 million charge for litigation costs, also related to BMI and its filing for bankruptcy protection. EPS excluding special items was $1.49. To give you some perspective, on the lower left, we’ve included our third quarter EPS trend over the last five years, which shows a 9% compound annual growth rate since 2019. And our third quarter EPS even includes $0.10 of higher interest expense versus last year. This EPS growth trends might not be so apparent given the significant dynamics at play over the last several years. Now we’ll review the performance of our two segments, beginning with Consumer & Specialty.

Sales in the Consumer & Specialty segment were $291 million 2% above last year and similar to the second quarter. Sales in the household and personal care product line were 9% higher than last year and 3% higher sequentially. Growth in pet care remains strong with sales up 15%. And sales across the other specialty consumer markets in this product line were 8% higher sequentially. Sales in the specialty additive product line were 2% lower than last year. While North American paper production improved from the second quarter demand remained below prior year levels in both North America and Europe. Meanwhile, volumes in Asia improved year-over-year driven in part due to the ramp up of our new satellite facility. In residential construction markets, market conditions remain mixed with steady demand for our products that are used in remodeling activity, helping to offset the impact of fewer new builds.

Adjusted operating income for the segment’s increased 23% year-over-year to $38 million. And operating margin was higher by 230 basis points, primarily driven by price cost recovery. Looking to the fourth quarter, we expect continued strength from household and personal care, driven by strong pet care sales and continued gradual improvement in other specialty consumer products. In specialty additives we expect typical seasonality and construction, partially offset by continued improvement in paper production in North America, and additional volume from our new satellites in Asia. In total, we expect operating income for the segment’s to be around $33 million in the fourth quarter. Note that this guidance reflects the deconsolidation of BMI, which means BMI’s revenue and profit will be excluded from MTI’s results going forward beginning in the fourth quarter.

Now let’s turn to the Engineered Solutions segment. Third quarter sales in the Engineered Solutions segment were $257 million similar to the prior year. In high temperature technology sales were 1% higher than last year. As demand for steel and foundry products in North America remains strong. And we continue to grow foundry volumes in China. And environmental and infrastructure sales were 2% lower than the prior year as commercial construction activity remains slow. Sales for drilling, wastewater and remediation applications continue to grow, including the completion of another PFAS remediation project using our floor absorb technology, this one at a U.S. Department of Defense location. Third quarter operating income for the segment was $41 million 12% above last year.

Price cost recovery and solid execution drove operating margin expansion in the quarter, which was 15.8% of sales and improvement have 160 basis points. Looking ahead to the fourth quarter for high temperature technologies, we expect continued strong demand in North America. And we expect conditions in Europe to remain similar sequentially. In Asia, we anticipate the growth trend and China foundry volumes will continue. In addition, we expect to see a benefit from higher laser measurement equipment sales. And finally in the environmental and infrastructure product line, sales will be lowered sequentially as we enter the seasonally slow period for environmental and construction projects. In total for the segment. We expect operating income will be approximately $35 million in the fourth quarter.

Our guidance includes some limited in impact from the UAW strike, and we are continuing to monitor the situation. Now let’s turn to our balance sheet and cash flow highlights. Cash flow accelerated in the third quarter as we expected, bringing year-to-date cash from operations to $138 million more than double the same period last year. Capital expenditures were $25 million in the quarter, bringing the year-to-date total to $71 million. And year-to-date free cash flow was $67 million. For the full year, we continue to expect free cash flow between $100 million and $125 million. Our balance sheet remains very strong. Total liquidity at the end of the third quarter was $458 million and net leverage improved to 2.2 times EBITDA. With leverage approaching our target of two times EBITDA and cash flow continuing to improve, we are well positioned to maintain our balanced approach to capital allocation, which includes returning capital to shareholders through our dividends and repurchase program.

Now I’ll summarize our outlook for the fourth quarter. Overall, for MTI we expect another solid performance in the fourth quarter. In the Consumer & Specialty segments, we expect continued strong demand from the household and personal care product line, and in pet care in particular. And specialty additives, higher sales into the paper and packaging market. Driven by our new satellites, and gradual improvement in North America production rates will be offset by seasonally lower construction activity, as well as the deconsolidation of BMI from MTI’s results. In the Engineered Solutions segment, we expect continued strength and high temperature technologies driven by higher laser measurement equipment sales and growing Asia foundry volumes.

Meanwhile, environmental and infrastructure will experience typical seasonality. As we currently sit with the fourth quarter operating income between $65 million and $70 million, and earnings per share between $1.20 and $1.30. This guidance represents a continuation of the company’s earnings growth trajectory. And despite the mixed markets we’ve experienced this year, this guidance equates the full year operating income growth of approximately 10% and full year EPS growth of 5% to 7%. In addition, we expect the fourth quarter to be our strongest cash flow quarter of the year. And so as highlighted earlier, the key elements of MTI’s business model were on full display this quarter. And this powerful combination of growth ability, margin improvement, and cash flow generation will continue to drive our performance going forward.

With that, I’ll turn the call over for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. And we take our first question from Daniel Moore with CJS Securities. Please go ahead.

Daniel Moore: Thank you. Good morning. Thanks for all the color and congrats on some strong execution and margin improvement. Maybe start with Erik, if you could give us a sense for obviously, you’ve made strong pricing gains, kind of volume versus price across both consumer and specialties as well as Engineered Solutions? And how long you expect the pricing to remain a tailwind?

Erik Aldag: Sure, Dan, thanks for the question. So, yes, so we had pricing, positive pricing in the quarter. And that positive price cost recovery contributed to a lot of the margin improvements that you saw, particularly this quarter. And that’s happening across both of the segments, more so in the Consumer & Specialties, I think when you go back to last year to 2022, as a company we’d have absorbed something like 150 basis points of margin from being upside down on price versus inflation. And this year, we set out to recover all of that 150 basis points through pricing. And so that’s what gets you to what we’ve stated previously have kind of a run rate averaging of $13.5 operating margin by the end of this year. And so we’re on track for that.

So, we’re achieving what we said we would do and more so you know, the price with cost recoveries coming to a greater extent in the Consumer & Specialty segment. But the overall pricing impact is much less than it has been in the first half as we’ve left some of our significant pricing actions from the third quarter last year. So, now we’re seeing the pricing and the low single digit kind of range in terms of an impact on our top line.

Daniel Moore: Very helpful, and then you just talked about, getting to that 13.5% adjusted operating margin, exceeded 14%, this quarter, in a relatively tepid demand environment, at least for across some of your businesses. So, you know, and I realized this is the seasonally stronger quarter, we just exited. But your longer-term goal is 15%, do you see that as being potentially somewhat conservative? If not, maybe the timing, then kind of the absolute level of where you see these businesses?

Doug Dietrich: And maybe I’ll jump in that one, Daniel. Look, I think, you know, we’ve set out a target of 15% by 2025, and yeah you are looking at a stronger, seasonally stronger quarter. But I do think it is representative of kind of the potential. As we knew that we’d start to capture cost deflation, we’d start to see those playing over. And we see that the pricing and the value of our products in the market, continues to hold. And I think you’ll start to see you’re seeing that through our gross margins as well. We’ve done a great job selling on value, we are a long-time stable supplier, because we own our unique mineral reserves. I think customers see that. And that enables us to make sure that we’re getting the value for our products.

And I think as you see the consumer business continue to improve, we continue to improve in pet care. You’re starting to see the growth in those higher margin specialty products, which are also higher growth, that’s part of that margin expansion. Yes, I think we can push through that 14%, 15% margin, I think further though, it’s going to take, that stable growth profile and leveraging our fixed and also getting those new innovative products in this specialty products out on market, those are higher margin products, those are, year, two years out. And I think, yes, there’s the potential to get past 15%. But we’re laser focused on delivering that 15%, like we told you by 2025. So, start there, I think there’s potential for more, it’s going to come from higher margin products and leveraging our fixed cost base that growth.